Will Oil Hit $200?

Saturday, June 14, 2008

Mohammad Ramin Khoshlessan

At Google’s third Zeitgeist conference on May 19, British Prime Minister Gordon Brown said: “It is… a scandal that 40% of the oil is controlled by OPEC, that their decisions can restrict the supply of oil to the rest of the world, and that at a time when oil is desperately needed, and supply needs to expand, that OPEC can withhold supply from the market.”

In response, OPEC Secretary General Abdullah al-Badri on May 22 reiterated the organization’s stance that it can do nothing to lower oil prices in a “crazy” market.

According to The Guardian, Al-Badri blamed record prices on factors such as geopolitical tensions, speculation, and the weak dollar, and not on output levels.

“Even if we increase output tomorrow, the prices will not come down,” he told Reuters during a visit to Ecuador, adding, “When we see there is a shortage of supply, we will act.”

Oil prices made their biggest single-day surge on Friday June 7, soaring $11 to $138.54 on the New York Mercantile Exchange, an 8 percent increase. That followed a $5.50 increase the day before, taking oil futures more than 13 percent higher in just two days.

Crude for July delivery traded as high as $139.12 a barrel in electronic trading on Globex on June 7, but dropped to $133.67 on Wednesday June 11.

Large consumer countries like the United States have pressed the Organization of Petroleum Exporting Countries to raise output to help tame prices. Washington says price increases are due to a tight supply, but OPEC has largely resisted the calls for a hike.

Al-Badri said there is currently no shortage of oil in the market and there is no need for any immediate output hike.

He later said at an oil conference he was “puzzled” by what was causing prices to rise because he saw no problems in the market of the fundamentals between world supply and demand.

Meanwhile, oil production from some of the world’s largest fields is declining after decades of pumping, forcing governments to increase spending on oil production and prospecting.

Persian Gulf oil producers are rushing to find new reserves and build more pipelines and export terminals to compensate for declining output from older reservoirs. Any delay in replacing supplies may push oil prices higher.

Energy experts cited numerous underlying causes for the rise in energy prices, which have persisted despite a weakening U.S. economy. For example, consumption in China, India, and the oil-producing countries themselves continues to rise.

Traders are also concerned about possible production cuts by OPEC members.

The biggest catalyst for oil’s seemingly remorseless rise has been the simplest economic driver there is: the balance between demand and supply.

Demand is at an all-time high, fueled by the continued economic expansion of the Indian and Chinese economies.

With more than a billion people in each country and both economies growing fast, manufacturers and consumers are sucking in energy at an ever-increasing rate.

China’s booming economy is devouring a huge amount of oil. China overtook Japan as the world’s second-largest consumer of oil in 2003 and is closing in on the U.S., with its demand for oil growing at about 15 percent a year.

Analysts worry global demand for oil is so intense that supplies may not be able to keep pace. The International Energy Agency says annual demand will rise 2 percent up to 2012, while other projections suggest demand could soar from about 90 million barrels a day to as much as 140 million over 25 years.

As the leading oil supplier in the world, OPEC is under constant pressure to do something about the price bubble.

OPEC has said the market is “very well supplied” with crude and will continue to be so in the immediate future.

It has blamed speculation by market traders -- who can make money by betting on the future direction of prices -- for the continuing price rises.

Critics of OPEC say it must do more to bring prices down.

In the meantime, high energy prices make life more expensive for consumers and businesses, having a knock-on effect on their spending in other areas.

But on the other side of the fence, oil giants are having a wonderful time, while oil-rich countries are also smiling.

The obvious conclusion is that until there is more supply or demand starts to take a hit, oil prices will continue to increase. If things stay the same, some analysts point to $200 a barrel as the balanced price. Meanwhile, the economic problems of the U.S. as well as speculators’ activities are also pushing prices up. In addition, other factors may arise. For example, the hegemonistic powers could try to expand their military adventurism to new fronts or new wars could break out. Even rumors of war cause fluctuations in oil markets.

To put it in a nutshell, there are so many variables at play -- including the machinations of hidden hands -- that no one -– not even Gordon Brown or Abdullah al-Badri -- can accurately predict the trend of oil prices. To curb oil prices, a global effort to massively utilize alternative sources of energy is required. Until then, the sky’s the limit for oil prices.